Academic journal article Journal of Accountancy

FASB Offers Compromise on Derivatives

Academic journal article Journal of Accountancy

FASB Offers Compromise on Derivatives

Article excerpt

By a 5 to 2 vote, the minimum margin needed for approval, the Financial Accounting Standards Board agreed to prepare an exposure draft on derivatives reporting that would require companies to record changes in derivatives value on balance sheets. Gain or loss treatment would depend on how the derivative is used and what type of exposure, if any, is being hedged. Gains and losses on derivatives that are effective hedges of assets and liabilities would be included in income, for example, but so would the offsetting gains and losses on the item being hedged.

"It's a realistic approach," James A. Johnson, partner of Deloitte & Touche's financial instruments and strategies group in New York City, told the Journal. "I think the FASB is trying to do a good job of updating its model in this difficult area." Johnson pointed out that managing risk has become a sophisticated task, and using derivatives to hedge against risk is becoming common. This is a strategy that really has nothing to do with such highly publicized events as the Orange County crisis.

He presented a simplified example of two identical oil companies: One decides to hedge its exposure to oil price fluctuations with derivatives--financial instruments that derive their value from underlying positions or indices--and one leaves itself exposed. "Suddenly, these are two very different companies. …

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